If I could do one thing smart, why not everything? I even looked smart! Curly hair and glasses. And I played chess. And had sold a company. So why shouldn’t I be automatically a genius at stocks.

Before this, I KNEW NOTHING about stocks. I had a web design company that employed mostly painters and artists and graphic designers.

Before that I worked at HBO where I interviewed prostitutes and before that I was a computer programmer.

I read a lot of fiction and would write a lot. I wanted to be a novelist when I “grew up”.

But I started buying and selling stocks. Every day. Morning, day, and night. I still knew nothing. The only thing I thought I knew was: I am a genius and nobody will stop me.

Positive thinking is a very dangerous drug.

I remember one morning, my wife was in the doctor’s office getting that scan where you find out the sex of your kid.

I was out in the hallway shouting in joy because I had made a million dollars in, again, what felt like a time travel machine.

I didn’t care about anything. Sex of baby. Buying a house. Flying a helicopter to play poker. Getting another house on the beach. Buying art. Heck, my 0 year old baby had a two story bedroom in the middle of Manhattan.

I didn’t care about any of that. I only wanted to make more money.

And then when Internet stocks started to collapse, I doubled down and then tripled down. I kept buying more and more stocks. I mortgaged my apartment. I borrowed.

I lost everything.

I had nothing left but a salary I was getting from a venture capital fund that I started. So I borrowed against my house again. Why not? My wife said, “Are you sure about this? This is our last money!”

And I said, “Don’t you believe in me?”

I was manipulative and scary and confident and arrogant. People would stop me on the street and ask me for stock advice because I looked so smart.

Finally I found out something. Something that has stuck to me this day. Something that I woke up even today, 17 years later, thinking:

I am an idiot. I might not be the biggest idiot in the world. But I’m just plain stupid.

And then I learned shame. People would stop me in the street and say, “Hey, how’s it going” and I’d say, “Great!” and try to get away as fast as possible before I would start crying.

I saw about ten psychiatrists during that time. None helped. I started to meditate. Instead of calm meditation it was violent “mad attention”. Nothing could shut off my panic and fear.

So I decided to learn. Here’s what I did, step by step.

READING

I read about 200–300 books on stocks. I read books written in the 1700s, 1800s, 1900s, 2000s about stocks and investors that I admired.

Separately, I can provide a list of the books I read. They were all valuable. But I’ll divide up here by category:

History of the markets. When you are learning something, it’s important to learn the history of how people got better.

When Bobby Fischer was a young boy, a good but not great player, he took a year off from playing. He was 13 or 14. I forget. He went and studied all the professional games played in the 1800s, almost a hundred years earlier.

By studying the history of the game he became great. He found improvements in almost every game played. So when he came back to play against the professionals of his day he made a clean sweep of the US Championship.

How did he do it? By steering all his opponents into these century-old games and then unleashing his opponents. They all thought they were going to play these sleepy 1800s-style games and he crushed them.

If you are a tennis player, you would study how Serena Williams trains versus Arthur Ashe. Clearly the history of tennis training has included muscle training at some point.

Understanding the history of how a field develops is the critical first step in understanding mastery . There’s easily 100 books on the history of the stock market that are worth reading.

Why a pop finance book? If you read “Supermoney” by Adam Smith you’d see. I loved that book so much I eventually talked Wiley into re-releasing some of his other books.

Contrarian books. Nothing in finance is what you think. Nothing. If you think tulips were a mania, you’d probably be wrong. If you think the Internet was a bubble in 1999, you’d probably be wrong. If you understand junk bonds, in the 1980s, you probably don’t. If you think Warren Buffett is a value investor, he isn’t. Perhaps at some point I can do a post on each topic above.

But there are plenty of books that really examine all the sources from the periods of each of those topics and they dive into both sides of the story.

Accounting. But not just accounting books. I can’t help it – those are boring to me. But understanding the difference between GAAP, modified GAAP, cost accounting, tax accounting, etc is important.

But what I really wanted to understand was fraud. How could I spot a fraud like Enron or Worldcom (or, dare I say it, AOL, which committed the same fraud as Worldcom but it was a different day and age and people ignored it).

Economic History and Corporate histories.

Ultimately the market is about the companies that make up that market. When you buy a share of stock, you are an owner of a company. It’s important to understand at a deep level what a company is, what supply and demand is, how companies go from “Good to Great”, etc. I looked at every economic trend since the development of exchanges which bought shares in trading companies and then bought options on selling the ‘futures’ of ships that had yet to bring back their gold.

Reading everything from Jack Welch to how Rockefeller built a monopoly to how Gates and Jobs created the PC industry – this is the stuff of which markets are made.

Psychology. It’s so hard to lose money on a trade. In a regular job you get a paycheck every two weeks. In trading, some days you make money and some days you lose money.

It’s a completely different psychological experience than we are ever taught about money and how to make it. So I’d read books (and become friends with) Brett Steenbarger, Ari Kiev (the basis for Maggie Schiff’s character in the TV show “Bilions”), and read articles by Flavia Cymbalista and others.

Maybe I can break this down into more categories but I think what I will do is provide the entire bibliography of what I read then and what I’ve read since.

Did reading give me all the knowledge I needed?

No, maybe 5%. But you can’t start the car without turning on the ignition. Reading 200+ books was the ignition. Then I had to drive.

I still read several books a month on finance, investing, and the history of industries. The most recent was Michael Lewis’s excellent book, “The Undoing Project” and I’m about to dive in on Ed Thorp’s new book.

SOFTWARE

I wrote software. I got a billion pieces of data about the markets. I bought CDs of data. Every second of trading since 1945 on every stock.

I wrote maybe a million lines of software over a five year period. I fed in all the data. The software I wrote helped me find patterns. I’d study all sorts of patterns. Examples:

IF a company made a lot of money and had no debt and was trading at a low price THEN where was it going to be a year later. Was the result statistically significant?

IF the market was down 1% a day for four days in a row, THEN what was likely to happen on the 5th day.

IF the market was down 2% from 9:30am to 3:30pm, THEN what was MSFT likely to do from 3:30pm to 4pm.

I found hundreds of patterns that seemed to create statistically significant trades that worked.

There were some trades that were literally like ATM machines at the time.

Pattern #1: This was my NO-BRAINER trade. It was cash in the bank by 10am every day.

IF, the Nasdaq 100 (an index of the top 100 companies on the Nasdaq) was opening up at 9:30 am between 0.4 and 0.6% higher in the next day, THEN it ALWAYS returns to 0% up by 10am.

I wrote about this pattern once and it IMMEDIATELY stopped working. It became no better than random luck.

Pattern #2: If a stock declared bankruptcy, it was halted. It announces the news that is was bankrupt and was worth $0. Then it would re-open. Against all logic, BUY it the second it opens. Sell it within a few minutes to 24 hours later. This was almost always good for 100%. Great examples were Enron and Worldcom.

Many years later, in 2009, I was in a gym and a guy came up to me and shook my hand. I said, “Do I know you?”

And he said, “You don’t but I wanted to thank you. GM just declared bankruptcy and I did your bankruptcy trade and almost doubled my money within minutes. So thanks!”

My girlfriend was with me at the time and was very impressed! Although I regretted not doing my own trade.

Anyway, there were 100+ patterns like this with new ones I was finding every day.

One time I visited Stevie Cohen, the massive hedge fund manager. I wanted to work for him. He was my hero. I showed him the patterns. He was fascinated. He said, “you have to work for me. We can help you make these even better.”

I was so excited. We walked out of his office together. Everyone was wearing their famous SAC fleece jackets (SAC = “Steve A. Cohen”).

He was joking around and we were talking about random things. When we got into the parking lot I asked him how his trading day had been.

He got into the car while saying, “I had my worst day of the year.” Then he closed the door and drove off. That’s a pro.

How I ended up not working for him is another story.

MENTORS

I talked to everyone I could. I wrote to (and worked for) Victor Niederhoffer and then Jim Cramer. I talked to many other hedge fund managers.

EQUALS

I joined every social media group and message board with traders and investors. I wanted to learn what they were all doing.

If you learn what everyone else is doing you can make a decision if you should do the opposite because chances are, there are periods where MOST people are GROSSLY wrong. That’s where money is made.

WRITING

I started writing for TheStreet and then The Financial Times. This put me in contact with hundreds of other people with equal interest to me. The readers were just as informative as the writers in most cases, perhaps even more so.

I started speaking ten+ times a year on behalf of Fidelity. I literally became a spokesperson for them for about eight or nine years.

I wrote a book, “Trade Like a Hedge Fund” which forced me to really clean up my patterns and make sure they were bulletproof.

Then I wrote “Trade Like Warren Buffett” when I found a package of letters that dated as early as the 1950s (not his public annual letters we all see now) that described in detail his early investment strategies.

I wrote “Supercash”, when I started interviewing many investment managers that used strategies to make money other than “just” buying stocks or commodities or the usual investment vehicles.

I wrote “Investing for the Apocalypse” for the Wall Street Journal to describe investment strategies that might work in an economic collapse.

I wrote “The Forever Portfolio” in the middle of the Financial Crisis to describe stocks and industries one should buy in case the market fell apart. Those stocks, as a group, are now up about 400–500% even though the market is up about 100%.

Only 299 people bought that book because it was December, 2009. The market was collapsing. Nobody wanted anything to do with stocks.

Writing forced me to constantly keep my head in the financial waters and keep learning to stay one step ahead of everyone else.

And because I had spent over a decade writing short stories and unpublishable novels I had skills that many other hedge fund managers didn’t have.

DOING

All of this would be worthless if I wasn’t actually DOING.

I started day trading my software in 2001. It was the worst bear market ever (meaning: the market was going down almost every day). We were in a recession, 9/11 happened, Enron and Worldcom went bankrupt, and I was buying stocks every day based on my software.

I was profitable almost every day. I don’t think I had a down month although my expenses at the time were enormous.

Eventually people gave me money to trade. I was day trading up to $60 million or more every day in the markets.

DOING, PART TWO

I wasn’t very talented at raising money.

One time my neighbor came up to me. He said, “Come meet my boss. He will love you. He’ll definitely give you money.”

I went to meet him in Manhattan at the famous “Lipstick Building”.

I spent an hour talking with my friend’s boss. Finally he said to me, “I can’t put money with you but you are welcome to work here if you want.”

He said, “I have no idea where you are putting your money and we can’t take any reputation risk.”

He said, “The last thing we need is to see the name Bernard Madoff Securities on the front page of the Wall Street Journal”. He pointed to himself. Because it was his name on the door.

After I left, three different funds called me and asked, “How can we put money with him?” Or, “What does he do to make money. We want to do it?” But I had no answers.

All of these people have since denied calling me. “We knew all the time” is what they say now, which is the key underpinning of all human behavior.

Self-awareness is a hard thing to find in a busy world.

But I was depressed. I didn’t realize then that many of the funds I was competing for for money were illegally making money and nobody knew.

So I felt I had no chance to raise money.

SO THEN….

I decided to give up trying to make a big hedge fund. Instead I decided to do a “fund of hedge funds”.

I researched hundreds and hundreds of funds and interviewed them and studied and found the best 12 to invest in.

I did it: I raised about $40 million (not a big amount but enough to start) and invested in a dozen funds.

It’s 12 years later and I am still friends with at least half of the funds I spoke to.

The other half…let’s just say they avoided jail by paying fines and then the rich founders disappeared and were never seen again as they began their lifetime voyages around the world.

DOING, PART III

I felt like my fund of hedge funds was not helping anyone but a few rich people. And I was losing confidence in many of the funds I was invested in.

I remember one fund I visited in 2005 or 2006 outlined for me how the world was going to end.

First mortgages were going to go bust. And then all the derivatives on those mortgages would go bust. They were betting against the entire system and every month the market was still going up, they would lose money.

“But when the market finally collapses we will make billions for our investors. You are welcome to invest with us but we are not letting everyone in.”

I didn’t take the risk. I didn’t want to lose every month while they waited.

In 2006–7 they made about $10,000,000,000. John Paulson went from having $100,000,000 for himself to being worth in the many billions.

“Our main worry,” they told me, “is that according to our models, all the banks will go bankrupt very quickly. So we might not be able to collect our money before the world collapses.”

Which would have happened if not for the government bailouts, allowing them and a few other big hedge funds to collect while everyone else suffered.

So I decided to shut it all down.

And I made a website instead which outlined some of my main investment strategies. I won’t go into the details of that site because I describe it elsewhere many times and I sold the site pretty soon after I made it when we started getting millions of users a month.

Nevertheless, the money I made from selling that website, and from doing all these funds, was quickly lost by me when I became arrogant again.

Someone smarter than me is investing. So, for instance, I invested in Buddy Media, a private company, in 2007, when I heard that Peter Thiel and others I respected were also investing.

Someone smarter than me is running the company. The worst thing I can hear after I invest in a company is the phone ringing. I never want to talk to the company again after I put my money in. If they need my advice on anything then I know the are in trouble.

So I don’t put my hard dollars to work unless the CEO has been there, done that, and knows what he is doing even in the worst-case scenarios.

I believe in the trend. I’ve been spotting trends successfully for 25 years, ever since there were just 50 websites out there and I learned how to make websites myself. But I’m not always smart enough to monetize trends. So I bet on the people who are.

I see money. I can understand clearly how the company will make money. Perhaps there are already customers (customer money is much cheaper than investor money) and I can understand how the company will “exit” and I will make my money back .

There are other factors I’ve added through the years. I’m a big believer in investing in potential monopolies. But what that means is tricky in each case.

I’m a big believer in seeing “skin in the game” as my friend and “virtual mentor” Nassim Taleb puts it. I want to see the CEO in pain by how much money he puts in his own company and how much time, etc.

Studying Nassim’s four books on investing are must-reads. They outline exactly what it means to be “the stupid person in the room”. i.e. his books are all about avoiding being me. I was fragile and not “Antifragile”. I was always “Fooled by Randomness”.

Being a good investor is about “eating what you kill”. You only make money when you understand the world correctly and have the psychology to go against the norm. For me, it was a test of character and mostly I failed but I hope I am a little better now.

They aren’t always the most successful, but perhaps my biggest failure is thinking I had to be successful all the time.

It took me a long time to realize I only had to be successful a small percentage of the time.

It took me a long time to realize how little one can possibly realize about the nature of the world.

Important rule: the ones who are successful ALL the time are either criminals or about to lose everything

And what do I do now? How do I continue to learn?

Don’t read the news. I’ve written for all the newspapers. The news tries hard. But it’s only the rough draft of history and a very poor rough draft at that.

And most of the time they have to ride the wave of current opinion so as to keep advertisers. “Current opinion” is usually a euphemism for “go the other way”.

Read new books from people I respect. Although I don’t run a hedge fund, I manage about 30 investments (mostly private) and I write and podcast constantly about trends. The world is 200% different since i started but i always try to stay fresh as if I were starting right now.

I also continue to talk to many of the investors I’ve known and continue to meet.

Beginner’s mind. I NEVER assume I am smart. I always look for the smart people to enlighten me. I talk to investors every day. I talk to people who work in every aspect of the industry, from government to banks to traders to investors to newsletter writers to media.

Systemic Risk .

Companies trade up if they are good and down if they are bad. In the long run. This is a very good thing.

BUT, the financial system never gets simpler. It ALWAYS gets more complicated. This is RULE NUMBER ONE —-> The financial system ALWAYS GETS MORE COMPLICATED.

In 2008 the system got too complicated for the market (derivatives of derivatives of derivatives on mortgages) and it collapsed.

In the Flash Crash of 2010 the system got again too complicated and, for a day, the market fell apart (high frequency trading run amok);.

And it’s so complicated now, there is definitely structural risk in the market. There’s nothing to do about it. Just be aware that this exists.

And finally,

I still DO.

I love writing. This is what I do. But I like learning how the world works. I love learning how peak performers achieve their mastery. That’s why I do a podcast.

I love sharing what I learn. I love the art of learning how to learn.

I love playing. I play games every day. Today I’m going to a lesson on how to shoot a rifle. Last night I played chess for an hour.

I want to continue writing fiction. I love standup comedy.

But understanding how the world works and what’s happening and the current state of innovation and optimism and the leaders of creativity is directly tied into the financial markets

The ultimate purpose of the financial markets, ever since the first trade ships were funded to go to the Spice Islands, is to fund innovation and exploration.

More than anything, I want to continue to explore my own life. The pieces I haven’t yet understood.

The failures and blind spots I’d like to see a little more clearly, both in my professional life and my personal life.

Every idea that moves the world forward seemed crazy the day before it became genius.

It was crazy to cross the Atlantic. It was crazy to take a bicycle and put wings on it to fly in the air.

It was crazy to inject people with dead diseases to protect them from future diseases. It was crazy to go faster than 30 miles an hour. Maybe it’s crazy to go to Mars in a flying car. Or to live life forever in a virtual reality that is better than this reality.

Who knows?

At this point, all I know is: I’m stupid. I try to be a blank slate every day. I’m open to anything. I’m willing to explore and learn.

And I ask every morning, and tell my daughters to ask: What is my mission today? And at night: Who did I help today?

Today I’m going to write this and then shoot guns for the first time in my life. And then have dinner with the genius professor who threw me out of graduate school.

I’m currently reading ‘This time is different’ by Carmen Reinhart and Kenneth Rogoff. I recommend it.

I love your posts about the stock market. I wish you had more of them. My favourite one is still an old one about how Arafat was screwed over in an investment and lost a bunch of money. That was a great post. I think you could turn that one into a movie.

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anon

“I can provide a list of the books I read.” — can you provide the list?

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JP Morgenthal

Would like to hear your opinion on businesses gaming the street. Investing used to be about buying into a business that you believed would be profitable because of the product or service they produced. They invested in growth and supported the activities financially needed to grow. Now it seems businesses focus on gaming the street allowing the share price to dictate how money will be allocated. For example, RIF’s to make quarterly numbers, tell employees to buy their own equipment, limit travel around activities not directly sales related. However, a lot of this is not reported. So how do you intelligently invest?